CRE Lending Standards Poised to get Stricter with Pending Rate Hikes
Last year, the U.S. experienced broad based economic expansion, with continued growth in the new year. Looking ahead, The U.S. Federal Reserve Board is likely to implement two to four rate hikes in 2018, with more possible in subsequent years.
The rate hikes would be coming at an unusual time, magnified in part by the extraordinary low rate environment commercial real estate has enjoyed since the financial crisis of 2008. The recent tax cuts enacted in December 2017 are, in part, meant to stimulate private sector investment. If the cuts do spur investment, we may see start seeing inflation, which could put additional upward pressure on rates. Impact to Commercial Real Estate? Amid higher rates, lenders could become more conservative in their underwriting standards as the cost of borrowing increases. Owners looking to refinance or take on new debt would likely have to clear more hurdles from their lenders in this scenario. Add to that the threat of increased supply in the office sector, and lenders’ appetites may weaken even further. Importance of Risk Assessment If we find ourselves in this higher rate environment, banks and lenders are likely to add more scrutiny around tenant credit as part of their loan underwriting process. A well-executed risk management policy can aid CRE borrowers by providing transparency around tenant cash flow risk and visibility into tenants that could face headwinds in a higher rate environment.